DP9520 How Do Politicians Save? Buffer Stock Management of Unemployment Insurance Finance

• Bent E Sørensen Steven G. Craig
23 Jun 2013

This paper successfully fits a model of forward looking government savings behavior to data from the U.S. state Unemployment Insurance (UI) programs 1976-2008. Specifically, we find states do not perfectly smooth tax rates in Barro's sense, but follow behavior consistent with a buffer stock model where politicians trade-off their desire to immediately expend all savings against the fear of running out of funds. We find that states increase benefits or lower taxes when savings balances are high. State UI budgets, as rationalized by the buffer stock model, display surpluses that are more pro-cyclical than Barro's model would imply but substantially less cyclical than contemporaneous budget balance.